More and Better Jobs: Are Fiscal Stimulus Packages Helping?

Submitted by Raj Nallari On Wed, 09/01/2010

co-authors: Derek Chen

Global GDP growth and as well as GDP growth in each of the regions were lower in 2009 compared to 2007. More specifically, specifically, negative growth rates were observed during 2009 in developed countries & European Union, Central and SE Europe & CIS countries and to a lesser extent in LAC, while the growth rates for East Asia, South Asia, Middle East, North Africa and Sub-Saharan Africa were positive in 2009 but lower than in 2007.

Reflecting this, all regions experienced higher unemployment rates, with the highest being in the developed economies & EU, Central and SE Europe & CIS and LAC economies, which again all had negative GDP growth rates in 2009. The ILO estimates that the global crisis has led to 34 million more unemployed and the World Bank estimates that about 60 million people may have been pushed into poverty.

Changes in Output and Unemployment
Difference between 2009 and 2007 (percent)

Women have been more severely affected in countries where gender differences in unemployment were high to begin with. Youth unemployment also showed an upward tick since the crisis and is currently at an all time high. According to the ILO, 81 million out of 630 million 15-24 year olds were unemployed at the end of 2009. This number is 7.8 million more than at the end of 2007. Largest reductions both in employment and working hours were observed in the manufacturing (export-oriented industries including garments and textiles, electronics, iron and steel and automobile sector) and construction is most of the countries. Estimates of under-employment are sketchy but add to the problem. In addition, the global downturn has displaced quite a lot of migrant workers.

Striving for decent work has become the main priority in a number of regions of the world. Fiscal stimulus packages in 40+ countries were aimed to support a global recovery. On average about 1.4 percent of world GDP was to be allotted for fiscal stimulus packages during 2009-10 with USA (5.6 percent of its GDP), China (13 percent of its GDP), Saudi Arabia and Malaysia being among the largest while for OECD countries fiscal stimulus averaged 3.5 per cent of OECD 2008 GDP. The aggregate fiscal stimulus for the G20 countries, which includes discretionary and non-discretionary automatic stabilizers, was estimated to be 2.6 percent of GDP for 2009.

The measures undertaken by countries to in response to the jobs crisis can be broadly grouped into 4 areas – (i) stimulating employment generation, (ii) social protection by providing income support to workers and families, (iii) labor market policies to support jobseekers and the unemployed, and (iv) stimulate social dialogue and consultations with business and labor on measure to counter the crisis. In a 2009 ILO survey that covered 54 countries, it was found that all countries gave high priority to new or additional investments infrastructure with the aim of generating employment. Middle and lower income countries typically invested more heavily in the expansion of social protection, while the high income countries focused more on labor market polices for the unemployed.

The ILO estimates that 7 to 11 million jobs were created or saved in the G20 countries in 2009 by the G20 stimulus package. These jobs created or saved were equivalent to between 29 to 43 percent of total increase in unemployment of 25 million in G20 countries for the first half of 2009. Without such spending, unemployment would probably have been much higher in these countries. That being said, in view of the current output and employment figures, the overall impact of the fiscal packages on output and employment thus far can be said to be mixed at best. Even though trade volumes have recovered quickly, there are other reasons that has led to the slow pace of economic recovery – smaller magnitude of fiscal multipliers, long delays between legislation and spending, bad design of the packages (e.g. in the USA stimulus was spent not on construction or infrastructure but on public servants’ salaries, healthcare, school teachers, police, alternative energy sources, all of which are important for society, but did not create enough new jobs) or consumers preferred not to spend but to save more in anticipation of an increase in taxes in future.

In the USA, small and medium firms (less than 500 employees) generated most of the jobs in the recent past. However, recent research (e.g. Haltiwanger et al August 2010) indicates that it is start-up and younger businesses that contributed to gross and net job creation, and not necessarily small or large size of the firms that matter for job creation. The fiscal stimulus packages did not provide many benefits to this segment nor reduce the uncertainty to venture into new businesses. In addition, in USA as well as in Europe labor mobility has decreased in part because those workers with sizable home mortgages are unable to sell their houses and re-locate as the housing market has crashed. Worker mobility also appears to be constrained by rapid urbanization which has resulted in exorbitant urban housing prices and rents.

In addition, the current higher unemployment rates observed in the U.S. and other developed economies may be a phenomenon that fiscal spending may not be able to easily eradicate. In these countries, there appears to be a longer trend of structural unemployment with hirings being lower than job openings because of skills mismatch. More broadly, empirical data shows that employment for middle-skilled workers in the advanced countries has been falling since 2000. Many economists believe that the advanced economies are undergoing structural change whereby middle-skilled level jobs are being substituted with cheaper technology and automation, and/or being offshored and outsourced to China, India, and elsewhere. The recent economic crisis could have given the ongoing structural change a boost - middle-skilled workers retrenched during the crisis would not be replaced even if the economy picks up again. Think of the manager who has gotten used to answering his/her own phone and managing his/her calendar with the help of i-phone or blackberry. If this is the case, the economic crisis would have middle-term and even long-term effects by significantly increasing the number of long-term unemployed and consequently the number of people who withdraw from the labor force. Under such circumstances, in order to have substantial impact on the unemployment rate, fiscal spending would need to include massive but effective relevant training and retraining programs to retool the unemployed with market relevant skills.

For developing countries, the economic crisis has sent shocks through large declines in exports, capital inflows and remittances, all of which tend to affect both employment and the wages earned. Less exports implies the loss of modern sectors jobs, which typically pay better relative to those in the informal economy. Decreases in capital inflows would lead to smaller rates of employment growth. Therefore, both declines in exports and capital inflows would not only tend to increase unemployment (in the formal sector), and also increase the number of workers in the already crowded informal sector, further increasing underemployment and lowering productivity, and consequently working poverty. Declines in remittances will have negative short and longer term effects on recipient households. This is because apart from being a significant source of income, remittances from migrants is also an importance source of education finance. Children of remittance recipient households in El Salvador and Sri Lanka have been found to have lower dropout rates and are more likely to receive private education. Therefore, declines in remittances will negatively affect the skills acquisition of workers of the next generation.

In summary, there are good grounds for concerns that fiscal stimuli (and monetary easing) will not be able to prevent the economic crisis from having long-term negative effects on the global as well as national labor markets for both advanced and developing countries. Some worry that the longer term trend will be one of jobless economic growth, particularly in the developed economies. Others worry that the future of industrialization is one of joblessness, while services will still be the sector generating jobs but technological innovation is higher in industry then in services sector. The job crisis has been and will continue to be complex with many factors. Beyond fiscal and monetary policies, what is needed is structural reforms in trade in goods and services, manufacturing, agro-processing for low-income countries, quality of education including through use of ICT, skills training and a host of labor market policies.